Opinion

Anatole Kaletsky

Yellen looks toward a Keynesian approach

Anatole Kaletsky
Feb 13, 2014 19:18 UTC

This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

The significance of Yellen’s testimony lay not in the fact that she was a bit more “dovish” than former Chairman Ben Bernanke, or seemed more committed to the new central bankers’ fad for “forward guidance,” as opposed to “quantitative easing.” More striking, if subtle, was the change in economic philosophy that Yellen represented.

Bernanke, despite his radicalism during the financial crisis, was philosophically an orthodox monetarist, who followed his mentor Milton Friedman in believing that the main job of a central bank is to stabilize inflation. For monetarists, consistently hitting an inflation target is, in normal circumstances, a sufficient criterion of monetary policy success. They believe that using monetary policy for other economic objectives, such as stimulating growth or creating jobs, is doomed to failure and ultimately leads to galloping inflation.

Once inflation is stabilized, monetarists explain, the “real” economy should be left to market forces. These determine the optimal levels of unemployment and growth that a low-inflation economy can achieve.

Behind the wave of market anxiety

Anatole Kaletsky
Feb 6, 2014 23:33 UTC

What has caused the sudden anxiety attack that overwhelmed financial markets after the New Year? We may find out the answer at 8.30 on Friday morning, Eastern Standard Time.

Almost all agree that the market turmoil has been linked to alarming events in several emerging economies — including Turkey, Thailand, Argentina and Ukraine — that has spilled over into concerns about more important economies, such as China, Russia, South Africa, Indonesia and Brazil.

But why has near-panic hit so many emerging markets at the same time?

There seem to be four broad explanations. Whether this current volatility marks the end of the straight-line ascent in asset prices that started in March 2009, or whether it is just another opportunity to “buy on dips,” will largely depend on the relative importance of each of these factors.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

Venice’s renaissance shows a path for European revival

Anatole Kaletsky
Jan 23, 2014 15:45 UTC

“I have seen the future and it works,” said Lincoln Steffens, a left-wing American journalist, on returning from the Soviet Union in 1919. After a weekend in Venice at a seminar organized by the Italian ambassador to Britain, I found myself struck by the same thought, which is not exactly the reflection that the world’s most perfectly preserved medieval city is supposed to inspire. Venice is a clichéd metaphor for “Old Europe” — a sclerotic old continent fixated on its past and now retiring to become a museum society, destined gradually to sink beneath the sea. But should we perhaps be inspired, not depressed, by the thought of Venice, the ultimate “museum city,” as a microcosm of Italy and even of Europe as a whole? After all, Venice is still standing, not sinking into the sea, and after 500 years of supposed decline it is still stunningly beautiful. Maybe Italy and Europe, instead of sinking, will also prove their resilience and make a comeback?

An event this week that pointed to this conclusion was the deal on electoral reform announced by Italy’s two biggest political parties: Matteo Renzi’s governing socialists and the opposition led by Silvio Berlusconi. This pact, which should create stronger majority governments, was significant — not just for Italy but for all of Europe, because quite modest policy reforms would be sufficient to revive the Italian economy and transform economic policy debate across Europe. For example, a broad consensus now exists for moderate labor reforms, for big reductions in the employment tax burden, for dismantling overlapping layers of government bureaucracy and for shifting welfare spending from over-generous pensions to education, training and active measures to help the unemployed. But none of these “supply-side” reforms would achieve useful results unless supported by a stimulus from monetary and fiscal policy.

The European Central Bank understands this, and even the German government’s resistance to economic stimulus is eroding. So if a stable and democratically credible Italian government showed willingness to seriously implement supply side programs, the ECB would surely respond with strong measures to expand credit, especially small business loans. And given the importance of small businesses to Italy, an aggressive program of officially-backed SME lending could have a similar electrifying effect on the Italian economy as it did last year in Britain, with government-guaranteed mortgage loans. In turn, a rebound of economic activity in Italy would have big effects on business and financial confidence in Spain, Greece, Portugal and France, as well as quite possibly transforming the German economic policy debate.

Will Britain really leave the European Union?

Anatole Kaletsky
Jan 16, 2014 16:00 UTC

Is it conceivable that Britain will leave the European Union? A few years ago this question would hardly have been worth asking.  In the past 12 months, however, the issue of EU withdrawal has shot into the British political headlines.

The latest, and apparently most authoritative, such headlines appeared this week, after a pugnacious speech by George Osborne, the Chancellor of the Exchequer and second most powerful figure in the British government. Reuters headlined the Chancellor’s comments like this: “Reform or lose us as a member, Osborne tells the EU.” The Daily Telegraph highlighted the same message: “Osborne warns Britain may leave EU over reform failure.” The BBC headline concurred: “Osborne – Don’t force UK choice between euro and EU exit.”

While the idea of a British EU exit has now become so mainstream that “Brexit” is a universally recognized acronym among diplomats and financiers, no British politician of Osborne’s seniority has previously threatened so explicitly to pull out. But does this really mean that Brexit is becoming more likely?

Five predictions for financial markets in 2014

Anatole Kaletsky
Jan 2, 2014 14:34 UTC

Happy New Year! For the first time since 2008, we investors, economists and businesspeople say these words without irony. While last year was statistically disappointing, with global growth slowing slightly from 2012 and apparently belying the optimism expressed here last January, the verdict of financial markets and business sentiment has been much more consistent with my predictions. Despite the apparent slowdown, stock markets enjoyed their best performance since the 1990s, long-term interest rates soared and consumer confidence all over the world ended 2013 much higher than it started. This apparent paradox is easily explained: the statistical weakness of 2013 was due entirely to a very weak period last winter, connected with the U.S. presidential election and leadership transition in China. By the second quarter, growth had revived in the U.S. and China and accelerated strongly in Britain and Japan.

That conventional wisdom last January was far too pessimistic about the economic outlook is evidenced by the subsequent behavior of financial markets, where equities outperformed bonds by the biggest annual margin on record. But today almost everyone is optimistic. So what unexpected developments could surprise financial markets and business sentiment in 2014? Below are five personal guesses — some possibly far-fetched and others are seemingly obvious, but none yet fully reflected in market prices:

1. Four is the new two.

I think the U.S. economy will grow by about 4 percent, much faster than the 2.5 to 3 percent predicted by the IMF and mainstream economic forecasts. My reasoning is simple. In the last reported quarter, the U.S. economy was already growing by 4.1 percent and the private sector by 4.9 percent. With U.S. budget battles now over and short-term interest rates firmly anchored at zero, there is no reason to expect a slowdown. If the U.S. accelerates to around 4 percent, so will global growth and 4 percent will replace 2 percent as the growth rate assumed in business and financial planning. Global inflation expectations will also rise to around 3 percent, raising the benchmark for global growth in nominal terms to around 7 percent, very similar to the 10 years before the 2008 financial crisis. In other words, the “new normal” of global stagnation widely predicted after the crisis will turn out to be not very different from the old normal.

Have markets finally received Bernanke’s taper message?

Anatole Kaletsky
Dec 19, 2013 16:33 UTC

Thanks goodness it’s over. Financial market behavior ahead of last night’s announcement by Ben Bernanke on a gradual reduction in U.S. monetary stimulus has been tedious and irritating, rather like listening to whining children in the back of the car on a long journey: “Daddy, are we there yet?” In fact, impatient whining about when the Fed might start to “taper” has spoiled for many investors what should have been one of the most enjoyable financial journeys of all time, scaling previously unexplored market peaks and passing through unprecedented monetary vistas.

Imagine if everyone had simply taken Ben Bernanke at his word when he said in May that the Fed would continue buying bonds at the rate of $85 billion every month until it was absolutely confident that unemployment was on the way to 6.5 percent and that the scale of these purchases would only be increased or diminished if and when a change was clearly warranted by economic statistics. Investors would then have concluded, as I suggested at the time, that no significant changes in U.S. monetary policy were likely until the end of 2013.

Stock markets around the would have enjoyed their strongest year for a decade without the trauma of the spring and summer “taper tantrum.” Nobody would have been shocked or embarrassed by the “September surprise,” when the Fed very sensibly decided to keep up the pace of monetary stimulus in the face of lackluster economic figures, despite the howls of indignation from analysts who were wrong-footed by their own unsubstantiated predictions of early tapering. Finally, investors would have been fully prepared for the Fed’s decision to go ahead with tapering this week. After all, the recent strong run of U.S. employment, housing and production data provided exactly the sort of strong economic background that Bernanke had posited all along as the necessary condition for tapering, especially in conjunction with the Congressional budget deal that was ratified by the Senate at the same moment Bernanke as spoke across town.

The budget deal and Washington’s new politics of compromise

Anatole Kaletsky
Dec 12, 2013 15:16 UTC

The muted market reaction to this week’s budget deal in Washington may initially seem like a disappointment. After all, uncertainty over government spending, debt and taxes has consistently emerged in business sentiment surveys as the biggest single factor holding back corporate investment and damaging financial confidence. Why then did Wall Street celebrate this breakthrough with its biggest daily fall in two months?

The standard explanation is that the budget deal will accelerate the tapering of monetary policy by the Federal Reserve Board, and that is probably a valid expectation. The main reason for the seemingly perverse response, however, is simply that this budget deal was predictable to the point of inevitability, even if most Washington pundits committed to the standard narrative of U.S. political dysfunction and gridlock did not see it coming until this week. Viewed from outside the Beltway, the inevitability of eventual bipartisan cooperation on the budget has been obvious since the 2012 election, which essentially settled all the important U.S. fiscal debates.

Having argued this position all year and having suggested back in October that a deal by this week was very likely, I could hardly be surprised that the markets greeted this event with a yawn. Short-term players on Wall Street have simply followed the time-honored formula of “buy on the rumor, sell on the news.” Business leaders and long-term investors, by contrast, are likely to be relieved and even enthused by this agreement, but their responses will have to be assessed over weeks, months and even years, not just a few days.

British economic governance encounters turbulence

Anatole Kaletsky
Dec 5, 2013 16:52 UTC

Students of British history will recall the story of Thomas a’Becket, the 12th century prelate who was handpicked by Henry II to become Archbishop of Canterbury because of his loyalty to the Crown. Within months of his appointment, a’Becket turned against the King in the numerous conflicts between church and state. As a result, a’Becket was murdered at the altar of Canterbury Cathedral in 1170, after four of Henry’s henchmen heard their royal master mutter in irritation: “Will no one rid me of this turbulent priest?” Archbishops do not have much political clout these days, but comparable spiritual importance now attaches to central bankers. And a central banker who suddenly seems reminiscent of Thomas a’Becket is Mark Carney, the recently appointed governor of the Bank of England.

When George Osborne, the British chancellor of the Exchequer (finance minister), delivered his Autumn Statement on Britain’s economic and fiscal prospects this week, he intended it as a “soft launch” for the Tory-Liberal government’s campaign for re-election in May 2015. The big set-piece speech offered Osborne an ideal opportunity to boast about the British economy’s sudden improvement this year and to announce some populist measures, such as a “voluntary” price-control regime for energy utilities, that were carefully designed to wrong-foot the Labour opposition. Osborne’s speech marked the start of a long political campaign designed to create a Pavlovian association in voters’ minds between government policies, rising house prices and the economic recovery. If this campaign is successful it will virtually guarantee election victory for the Tory-Liberal coalition — and it could even make an outright majority for the Tories conceivable in 2015.

Last week, however, the plan for a mutually-reinforcing cycle of rising house prices, strengthening consumer confidence, accelerating economic activity and improving Tory fortunes suddenly came under threat from the most unexpected quarter. Mark Carney was hand-picked this year by Osborne and was imported all the way from Canada because he seemed to offer less resistance than any plausible British candidate to the Tory plan for a pre-election economic recovery powered by rising property prices and re-leveraging by homeowners.

After initial promise, Japan’s new economy risks backsliding

Anatole Kaletsky
Nov 29, 2013 15:55 UTC

At a time when economic optimism is growing and stock markets are hitting new highs almost daily, it is worth asking what could go wrong for the global economy in the year or two ahead. The standard response, now that a war with Iran or a euro breakup is off the agenda, is that some kind of new financial bubble could be about to burst in the U.S. But a very different, and rather more plausible, threat is looming on the other side of the world.

Japan is the world’s third-biggest economy, with national output roughly equal to France, Italy, Spain, Portugal and Greece combined. This year, Japan has become, very unusually, a leader in terms of financial prosperity and economic growth. According to the latest IMF forecasts, Japan’s 2 percent growth rate in 2013 will be the fastest among the G7 countries, easily outpacing the next strongest economies, Canada and the U.S., each with 1.6 percent growth. Japan’s stock market has gained 70 percent since last December, far exceeding the 25 percent bull market on Wall Street, and Japan’s corporate profits are projected to increase by 17 percent, according to Consensus Economics, compared with the paltry gains of 3 to 4 percent in Germany and the U.S.

As someone very much caught up in the economic optimism inspired by the election of Shinzo Abe, I fear it is now time for a reality check. And observing the complacent inertia that seems suddenly to have paralysed Japan after July’s Upper House election, it seems worth recalling the famous maxim (usually attributed to Keynes) about unexpected events: “When the facts change, I change my mind.”

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